At a May 8 Congressional hearing, Russell George, the Treasury Inspector General for Tax Administration (TIGTA), indicated that, in tax year 2010, 2.2 million fraudulent returns were filed. About 940,000 returns involved identity theft. Fraudulent tax refunds totaled $6.5 billion from this group.

TIGTA auditors also estimated that there were 1.5 million other returns that involved identity theft. These returns included another $5.2 billion in fraudulent refunds. The total tax fraud due to identity theft in 2010 was estimated to be $11.7 billion.

George indicated that the investigation showed that 48,357 Social Security numbers were used multiple times. These stolen Social Security numbers enabled identity thieves to file multiple returns for refunds or to claim excessive deductions for non-existent dependents.

The IRS has reported that in 2011 it had detected one million potential tax I.D. fraud cases and withheld $6.5 billion in refunds.

On August 1, the House of Representatives passed the Stopping Tax Offenders and Prosecuting (STOP) Identity Theft Act of 2012 (H.R. 4362). This act increases tax fraud penalties in an effort to attack the tax-related identity theft problem. The bill also encourages the Attorney General to devote greater resources to the problem of identity theft-related tax fraud.

A bill has now also been introduced in the U.S. Senate, called the Identity Theft Tax Fraud Prevention Act (S. 1534).

A typical strategy for an identity thief involves five steps.
1. Social Security Number – Obtain another individual’s Social Security Number, often from a hospital, doctor’s records or other business source.
2. Debit Card – From a bank or other financial institution, obtain a debit card that can receive the refund.
3. Filing – Attempt to file early be able to use the stolen Social Security number before the legitimate taxpayer.
4. Fictitious Returns – Estimate earnings on the W-2 and other forms on the fictitious return. Frequently, the IRS has sent out the refund before checking the W-2 amounts.
5. Receive the Refund – In many cases the fraudulent refund is credited to the debit card.

At a recent joint hearing of the House Ways and Means Oversight Subcommittee and the Social Security Subcommittee, members of both parties agreed that Congress and the IRS must take action to reduce tax-related identity fraud.

– Heinz J. Brisske